Sovereign Debt’s Unprincipled Practice Path
The IIF’s annual report on its 15-year old voluntary market-based sovereign debt restructuring principles and related investor relations practices offered mixed sustainability and transparency views. It noted that emerging debt is over one-quarter of the $250 trillion global total, above 300% of GDP, and that half the frontier country amount is in foreign currency with associated refinancing risk. Excluding China, non-resident capital inflows will rise $75 billion to $700 billion this year on yield search despite trade battles, as interest expense increases as a budget item at the same time climate change costs are absorbed. The report finds that good policies and communication over the past decade since crisis have bolstered confidence, as it probes recent defaults in Barbados, Congo, and Mozambique to draw cautions. It focuses on the 35 recipients of official debt relief under a program coinciding with principles launch, with private investors now holding one-fifth of public external obligations. Non-Paris Club bilateral creditors and episodes of “unreported debt” are now prominent. Zambia may soon fall into the hidden and restructured category, and Gambia is a special case where overlapping lines from “plurilateral” providers must be resolved.
Mozambique’s Eurobond exchange offer is due end-October with a collective action clause to reach near unanimous participation, following years of fitful dialogue with discovery of unauthorized loans and IMF program suspension. The former finance minister and Swiss and Russian bank executives are under indictment in the US for corruption and bribery, and the country’s constitutional court struck down previous government guarantees on tuna company debt. The new bond yields are half the former 10% until 2023 when they again revert, with maturities stretching past 2030. An engagement provision reflecting the London-based International Capital Markets Association model was added, and the Fund disbursed an emergency $120 million credit in cyclones’ wake. However debt/GDP is above 100% despite two-thirds at concessional rates, evoking the prospect of near-term renegotiation. The Congo Republic rescheduled with Chinese sources, including unaccounted for construction facilities with the Public Works Ministry. Over $350 million was cancelled, and the IMF approved a $450 million arrangement in July with $900 million in commercial and official arrears still outstanding. Two big oil trading firm are in “good faith “talks with the amount due approaching China’s 20% of GDP and complex pre-financing structures delaying resolution.
Barbados reorganized domestic debt at 80% of the load last year, and proposed large haircuts and maturity extensions international bondholders initially rejected. It received a fresh package of bilateral and multilateral loans after finding pension liabilities hiking the GDP ratio to 150%. Central bank claims were excluded from the local workout, which paved the way for a $300 million Fund deal. The IIF also looked at Puerto Rico, Venezuela and Argentina, with Caracas not paying an October state oil company installment but the Trump administration’s sanctions preventing Citgo asset seizure pending possible internationally-recognized Guiado government takeover. In investor relations norms Ecuador, Egypt, Ghana and Lebanon improved 5+ points in the 40-country scorecard, but Brazil, Mexico and South Africa as seasoned and sophisticated issuers continued to lead on office, website, and data availability best practice.